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The past two years as superintendent of the New York State Insurance Department have afforded me both a valuable education and a rare perspective into the issues facing our industry and the path that lies ahead.
Since the department's creation in 1859, New York has been a leader in regulation and in providing a home for the insurance industry, and I'd like to think we've lived up to that tradition these past two years. Certainly, as superintendent, I've lived through some very interesting times. Happily, as I leave, I see good things on the horizon.
In my first few months in this job, I was involved with some momentous and contentious changes. Compensation structures changed dramatically. Then there were the externalities, like not knowing if the Terrorism Risk Insurance Act would be extended; and having to deal with massive insured losses from hurricane damage. The industry seemed caught up in its own storm, but it adapted and survived, and now thrives. As it will in the future.
I expect and hope there will be more changes to come. The first change I suggest might be a surprise, coming from a state regulator, but I think we need an enhanced federal role in insurance regulation.
President Theodore Roosevelt is one of my heroes. Among his many great attributes, he was a visionary, whether it was his stewardship of the environment or his views on regulation. Speaking about insurance regulation in 1905, President Roosevelt said, "The United States should in this respect follow the policies of other nations by providing adequate national supervision of commercial interests which are clearly national in character." That's just as true today.
State regulators can do many things well, and I think better than any federal regulator could, such as consumer protection. Property/casualty insurance, which is impacted greatly by diverse geography, weather and economic activity, argues best for state regulation because that is where specific knowledge of these factors can best be found. State regulators have a long and proud history, and have established state regulation as the standard for the industry.
But there still is a place for federal regulation. There is no reason the life industry, to cite one example, should not be able to operate under uniform rules in all 50 states. In the life sector, what is important is providing the flexibility to quickly introduce new and innovative products to better serve consumers. The federal government has a role to play in circumstances like this.
While we have to preserve what the states do well, we also need to encourage them to do better and faster what can and should be done better and faster. Fifty states with 50 insurance departments can easily find 50 points of difference in any proposal, but a federal stick could go a long way toward facilitating timelier product approvals.
There is also a need for a strong federal role in protecting against disaster. Fortunately, the incoming leaders in both House and Senate have indicated they understand the importance of a federal backstop for terrorist attacks. Without a program like TRIA, the market cannot readily absorb the effects of a terrorist attack. We saw what happened after Sept. 11, 2001. We saw how, understandably, companies no longer wanted to provide terrorism coverage at affordable rates.
I say "understandably" because as chair of the National Assn. of Insurance Commissioners' Terrorism Insurance Implementation Working Group, I chaired a public hearing on this issue and heard numerous sobering reports on the economic repercussions of the use of nuclear, biological, chemical and radiological weapons. While the Sept. 11 attacks caused insured losses in the tens of billions of dollars, experts at the hearing spoke about scenarios under which insured losses would be in the hundreds of billions of dollars. How can an industry with about $450 billion available to cover losses effectively cope with an NBCR attack on a large city, where scenarios have predicted insured losses from damages starting at about $700 billion?
More can also be done to provide protection against both man-made and natural catastrophes. Included in the record profits that property/casualty insurers made last year is a premium charge for potential future catastrophes. However, under current U.S. statutory accounting rules, companies are not required to establish a statutory reserve, nor are there tax benefits for doing so.
Tax policy needs to be changed so insurance companies can accumulate reserves on a tax-deferred basis in advance of a catastrophic event. The accumulation and segregation of these tax-deferred reserves in special-purpose vehicles is the best long-term, private market solution available. This would provide a private pool of capital to be used to mitigate the effects of any disaster, and could help reduce the exposure of the federal government, and thus taxpayers, to damages resulting from a catastrophe.
If one lesson has been reinforced by my two years as superintendent, it is that the insurance industry is the underpinning of our economy. Without it, meaningful economic activity cannot exist.
As President Teddy Roosevelt once said, "The hazards of sickness, accident, invalidism, involuntary unemployment and old age should be provided for through insurance."
We are a greater nation now, as President Roosevelt would have wished, but with new hazards inconceivable in his time. What has not changed is that we need a vital, profitable insurance industry to protect us against them all.
Howard Mills previously served as New York superintendent of insurance. He was recently appointed chief advisor, global insurance industry practice, at Deloitte & Touche USA L.L.P.